A self-directed solo 401k from My Solo 401k Financial may be invested in bitcoin / cryptocurrency using Coinbase, and many of our clients have been making investments in bitcoin using Coinbase since 2014 when the IRS deemed cryptocurrency property.
What is Cryptocurrency?
Per IRS Revenue Ruling 2019-24:
- Virtual currency is a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value.
- Cryptocurrency is a type of virtual currency that uses cryptography to secure transactions that are digitally recorded on a distributed ledger, such as a blockchain.
Most popular cryptocurrencies:
- Bitcoin
- Ethereum
- Litecoin
VIDEO SLIDES: How to Open a Coinbase Account for your Self-Directed Solo 401k
IRS View on Taxation of Cryptocurrency
Steps to Invest Self-Directed Solo 401k Funds Using Coinbase
STEP 1 – Open a Solo 401k
- Confirm that you are eligible (self-employed w/ no full-time W2 employees)
- IRS-approved plan that allows for cryptocurrency investments & provider with experience in helping others invest
STEP 2 – Fund the Solo 401k
- Open a bank account in the name & EIN of the Solo 401k
- Rollover Former employer plan or non-Roth IRA funds and/or make 401k contributions
STEP 3 – Open & Fund Account at Cryptocurrency Exchange
- Open a Cryptocurrency Exchange Account in the name & EIN of the Solo 401k
- Link the solo 401k bank account to the Coinbase account
STEP 4 – Store Cryptocurrency
- Separate and segregated wallet exclusively for Solo 401k investments
- Store in safety deposit box associated with Solo 401k bank account
Solo 401k Bank Account for Cryptocurrency Funding QUESTION
Correct that you need to open a bank account in the name of the solo 401k plan. You can then move applicable funds from the solo 401k Schwab brokerage account that we assisted in opening to the solo 401k bank account. Given the cryptocurrency exchange requirements, you will need to fund the account at the exchange with funds from a bank account in the name of the Solo 401k. The solo 401k bank account is generally linked to the cryptocurrency account that is titled in the name of the solo 401k plan.
Use My Personal Account for Cryptocurrency/Bitcoin Account QUESTION
This confirms that the accounts at the cryptocurrency exchange must be under the name and employer identification number of the solo 401k.
You cannot open an account under your name and Social Security number and deposit and/or hold solo 401k funds as this would constitute a taxable distribution.
Moreover, the cryptocurrency exchanges are now required to report account activity to the IRS with respect to the tax identification number on the account so this means that the exchange would report the activity under your Social Security number such that the IRS would expect you to report the same activity on your personal tax return (which would not be correct if the activity relates to your solo 401k funds).
12 Comments
Hey Mark, is there a way I could contact you regarding some questions funding a crypto 401k?
Hi and please email me your questions and contact information.
Am I able to use roth funds to transfer to Coinbase to open an account?
Yes the existing Roth IRA can be invested in a limited liability company (LLC) once it has been transferred to a self-directed Roth IRA with a self-directed IRA custodian such as Forge Trust (https://forgetrust.com/). We assist our clients in setting up the LLC and facilitate the investment of the self-directed Roth IRA in the new LLC. Once the self-directed Roth IRA has been invested in the LLC, we can guide you in opening the Coinbase account in the name of the new Roth IRA LLC.
I’ve tried opening an self directed LLC account with Coinbase. It keeps getting rejected because Coinbase says I can’t use a business account to invest.
Can I open an Individual Roth IRA crypto currency? to fund my 2020-2021 contibution before April 15, 2021
You certainly can and the IRS recently extended the 2020 annual IRA contribution deadline to May 17, 2021. See the following: https://www.irs.gov/newsroom/tax-day-for-individuals-extended-to-may-17-treasury-irs-extend-filing-and-payment-deadline
Hey Mark, thanks for all the valuable information! How do you recommend people handle different accounts within the trust itself? For example my wife and I are the employee participants and we each have a Roth/Traditional accounts (for a total of 4). The Coinbase Prime account opening process is LONG at present (2 months) and I managed to get just one account open for the trust itself. Now I’m wondering if I just “rename” it in Coinbase somewhere as one of the accounts “Solo 401k Trust – FBO [My Name] Roth” and call it a day. Thoughts?
Hi and good question. A solo 401k is defined contribution plan not defined benefit plan. As a result, each participants solo 401k funds and sources (i.e., Roth solo 401k and Pretax solo 401k) have to be separately tracked. Because of this requirement, it can be cumbersome to invest in cryptocurrency. A solution, however, is to pool both participants funds under the same solo 401k in an LLC and open the crypto account under the LLC. Such LLC structured is commonly referred to as a “Solo 401k LLC” because the sole member of the LLC is the solo 401k plan. See the following for more information: https://www.mysolo401k.net/the-process-of-investing-a-solo-401k-plan-in-a-single-member-llc/
The result is the pooling of both participants solo 401k funds and sources in one LLC, and because both participants participate in the same solo 401k plan, the investment of the solo 401k in the LLC is considered the sole member.
Thank you for the video. I am trying to set up an account for my solo401K. The interface is not actually the same and I do not see the option for adding “personal investment company” in the drop down menu. It is asking for an Industry and business type with limited drop-down menu choices (different from what you have here). Can you suggest what to select? For the legal entity type i have selected LLC. Then it requests Industry and the choices are: crypto services, agriculture, education, financial services(non-crypto), food and hospitality, government/politics. health/fitness, industrial, media/arts, non-profit/charity. professional services, real estate, retail, technology/IT (non crypto), transportation & shipping, trust.
The drop-down under that is for business type varies depending on the industry type.
Thanks, see the answer to my question already. got a bit confused during the process
Hi Mark, I have a question on this statement – ‘Link the solo 401k bank account to the Coinbase account’. Can I directly link my solo 401k trust account at Fidelity to coinbase ? Thanks